Analysis: Turkmenistan Oil and Gas Exhibition and Conference

nCa Analysis

Ashgabat, 19 November 2007 (nCa) --- Turkmenistan hosted 13-15 November 2007 the annual oil and gas exhibition and conference – Oil and Gas of Turkmenistan 2007.

The exhibition featured 132 entities from 21 countries. The conference boasted 66 speeches from local and foreign experts and officials.

This was the twelfth year, without any break, that Turkmenistan has been hosting this twin event. This year’s was the biggest event so far. Some 480 oil and gas executives came to Ashgabat in search of possibilities for mutually beneficial partnership.

Looking at the number of participants, it was obviously a big success. However, in order to benefit fully from this exercise, the people who traveled to Ashgabat, especially the western oil and gas executives, must understand certain nuances.

The Carrot of Investment

It is important to understand that the offer of investment is not the open sesame anymore. The partnership proposals must carry something more than just the investment.

As Sam Bodman, US Secretary of Energy, pointed out in his keynote address, “World demand for energy will increase by more than 50 percent over the next 25 years, requiring all of us to find significant new supplies and suppliers of energy. An astounding $22 trillion of new investment will be needed between now and 2030 to meet this expected demand.”

Although the demand for investment would rise parabolically, let’s flatten out the graph for the sake of simplicity --- US $ 22 trillion over a period of 22 years means one trillion dollars annually.

How much of that does Turkmenistan need?

Some experts say that, looking at the oil and gas development plans of Turkmenistan up to 2030, the country may need some five billion dollars of investment annually.

This is merely 0.5% of what the world is going to pump into the oil and gas sector every year.

There are indications that Turkmenistan already has offers for investment exceeding this modest goal.

Saudi Arabia is going to invest US $ ONE TRILLION around the world over the next five years. The Riyadh Chamber of Commerce and Industry has offered to finance any number of projects in Turkmenistan. This is a blank cheque, unconstrained by the nature or size of projects.

UAE is another country with lots of spare cash lying around. Sheikh Khalifa bin Zayed Al-Nahyan is scheduled to visit Ashgabat in February 2008. His special envoy, Sheikh Al-Ketby, met President Berdymuhamedov last week in Ashgabat in preparation for the visit and repeated the offer of massive investment in joint projects in Turkmenistan.

Russia is flush with its newly acquired petrodollars. Turkmenistan is one of the natural destinations for Russian investment. However, Russia operates differently. About 47% of the participants of the exhibition – 62 companies – were from Russia but they were there mostly to show their flag. There was no flurry for new contacts, no maneuvering to get a toehold – they are there already. The slim number of Russian speeches – 7 out of 66 – should not deceive anyone. They are saying what they want to say through a number of established channels.

Turkmenistan-China gas pipeline, the biggest investment project this side of Amudarya River, is one of a kind deal. China is going to invest everything right from drilling, development and extraction to purification and pumping. Turkmenistan is not required to invest anything in the project even though the final price tag could exceed US $ 10 billion.

The new and emerging energy operators and consumers such as India now have the potential to match the investment offers of the established players. Lesser strings are attached to their offers, maintaining watertight separation between business and politics.

Under the circumstances, it would be advisable for the western companies not to append too much significance to their ability to invest in Turkmenistan. There must be more meat around the bones of the proposal.

The three models of interaction

If we agree that investment alone is not the decisive factor, what else should be included to make the offer attractive for Turkmenistan?

The answer lies in studying the three distinct models Turkmenistan has followed over the years for its interaction with foreign partners:

• Merhav Model
• Chalyk Model
• Enex Model

Merhave was the first foreign company to implement successfully a mega project in Turkmenistan – the reconstruction and modernization of the Turkmenbashy refinery. This is an ongoing project and it has consumed more than US $ 1.5 billion of investment so far.

The Merhav formula was to act as project leader, put together a consortium of world-class companies and act as guarantor between the supplier/contractor and the client. On one hand, Merhav supervised quality control and on the other hand it made sure that contractors and suppliers got paid in time.

Those were the initial years of independence and Turkmenistan was cash-strapped. The success of the Merhav model depended on building a bridge between Turkmenistan and the investors.

As the years passed, Turkmenistan’s ability to make payments increased.

Enter the Chalyk model.

Chalyk Holding, owned by the Turkish businessman Ahmet Chalyk, started bringing in new partners for Turkmenistan. Parker Drilling and General Electric were two of the foreign companies that acquired their share of the Turkmen space through trilateral deals with Chlyk Energy and Turkmenistan.

Although there were several reasons for this kind of arrangement, many of them located outside Turkmenistan, the success of Chalyk model depended on taking care of all the bureaucratic and procedural rigmarole, freeing up the foreign partner to concentrate on the professional job. This model has also come to the end of its functional life.

The third model, emerging now, is the Enex model.

Belgian company ENEX Process Engineering, led by its general director Koen Minne, is pioneering the way for a new kind of interaction with Turkmenistan.

This approach can be described as ‘the total solution.’

As far as business is concerned, Enex is offering a mix of traditional and non-traditional proposals. In addition to what Enex has been doing in the oil and gas sector of Turkmenistan for a number of years, there is the offer to start producing a basic ingredient for solar batteries, a vital source of alternative energy.

This is especially appealing to Turkmenistan now that the government is trying to prepare for the time when it will run out of hydrocarbon resources. The Avaza free tourist and economic zone and the North-South trade and transportation corridor are also part of the effort to ensure that Turkmenistan will live comfortably even when there is no oil and gas to sell.

Moreover, Enex contributed vitally in making the Berdymuhamedov’s visit to Brussels a resounding success. Enex chief was present at the airport to receive Berdymuhamedov, his company liaised a number of meetings, Enex co-hosted the dinner where the entire who-is-who of the European business community was present to listen to the speech of Berdymuhamedov and Enex facilitated print and electronic media placements.

This is total solution and any major companies wanting to succeed in Turkmenistan may need to study this model carefully.

Multinationals and the Azeri Factor

The traditional multinationals in the oil and gas sector such as BP, Shell, Chevron and ExxonMobil would obviously be welcome in Turkmenistan but there may be certain prerequisites for a fruitful interaction.

For starters, one needs to define as to what kind of projects would fit into the space available to multinationals.

The China deal is one of a kind and one cannot expect any other companies to get mainland PSA’s in Turkmenistan anywise soon.

The only area available to multinationals would be the Caspian shelf of Turkmenistan that is certainly rich in the hydrocarbon resources.

However, once a multinational has acquired the PSA and reached the production stage, what would it do with all the oil and gas in its block?

The logical solution would be to use the Iranian route to feed the European markets and Iran may not be averse to the idea of expanding its pipeline network through its own investments. After all, sooner or later, Iran is also going to start producing something from its own sector of the Caspian and the pipelines would come handy to serve the European buyers. Even though the multinationals, if they use the Iranian route, would be technically in compliance with the US policy of non-investment in Iran, the fact of the matter is that Uncle Sam would come down heavily on any such idea. The USA would make all efforts to deny Iran the benefit of transit fees and strategic alliance with Europe.

The only option would be to make Trans-Caspian pipeline a success if the European and American multinationals want to invest in the Caspian shelf of Turkmenistan.

Trans-Caspian, as we have said in our earlier commentaries, is not a pie in the sky; it is a very real project provided some hurdles can be removed from its way.

Turkmenistan has shown its willingness to go along with the idea but the real problem lies on the other shore of the Caspian.

At least three major fields are disputed between Azerbaijan and Turkmenistan and there is also the question of credibility.

If the principle of the modified median line is followed, two of the three fields clearly belong to Turkmenistan.

The modified media line being the line running through the equidistant points from both shores of Caspian would demonstrate that:

Kapaz/Serdar is 173 kilometers from Azerbaijan but only 103 kilometers from Turkmenistan. This field clearly belongs to Turkmenistan and by no stretch of imagination can one justify its ownership to Azerbaijan.

Azeri/Hazar is 154 kilometers from Azerbaijan and only 120 kilometers from Turkmenistan. The rightful owner of this field also is Turkmenistan.

Chirag/Osman straddles the median line in the existing maps but a fresh survey of the Caspian, keeping in view the sea level that has risen by more than two meters in the recent years, may well put this one also into the Caspian sector of Turkmenistan.

The multinationals, with their big presence in Azerbaijan, should use their clout to help transfer the ownership of these fields to Turkmenistan. If they cannot do it on their own, they should attract political pressure from EU, USA and international bodies to return the possession of the fields to their genuine owner. Thorny as the issue is, there is no way to bypass it.

In addition, there is the question of credibility of Azerbaijan. There are also some unanswered questions related to the conduct of multinationals.

The last time there was the elation that Trans-Caspian pipeline was about to take place, two things happened simultaneously that smashed the project: 1. Azerbaijan discovered Shah Deniz and announced its intentions to use the entire capacity of Trans-Caspian pipe (16 bcm) for its own volumes; and 2. The consortium leader backed out of the earlier promise of making US $ 500 million of advance payment to Turkmenistan.

The fact that these two things happened nearly simultaneously creates some questions that would better not be spelled out here but the whole things has left some lingering doubts about Azerbaijan and the multinationals.

The Nabucco Concept

The Nabucco concept, as opposed to the Nabucco project, is a wonderful idea, full of exciting possibilities. Instead of drawing imaginary pipelines on the map, efforts should be made to refine the concept and attach some definite handles to it.

This would require coordinated political support from the EU. In order to do so, the Europe would need to come out with a unified energy policy.

Nabucco planners concede that without the Turkmen volumes it may be difficult to get the project up and running.

The Caspian shelf of Turkmenistan is rich in gas and even now the present PSA holders can supply enough volumes to fill at least half of the pipe. However, there is a whole bunch of issues related to Azerbaijan and nothing short of full political support from EU would get the project going.

The EU has shown during the exhibition and the conference that it is finally putting its act together but it is still a long mile away from the point where it could convert good intentions into concrete projects.

While the political EU and the business community need to partner together, there is also the option of giving a second look to Iran.

The experience around the world shows that inclusion rather than exclusion brings positive results. If Iran is included in the Nabucco planning, there are chances that at some stage it would voluntarily reshape its nuclear programme to ease concerns from certain quarters.

Manufacturers and suppliers

The people who can find the results of the exhibition and the conference compatible with their expectations are the manufacturers and suppliers of the equipment and machinery.

The large and medium manufacturers and suppliers in the exhibition had a wide array of solutions for the mainland and offshore needs of Turkmenistan. Looking at the way the Turkmen officials took interest in their products and services, one can say that many of them can soon expect to start or expand their presence in Turkmenistan.

The Dark Horse

Midland Oil and Gas is the dark horse. It would be interesting to watch the progress of this company in Turkmenistan.

The company brochure says that it was founded in the UK as an energy venture of a Swiss financial company. The brochure doesn’t mention the name of the parent Swiss company.

In the opening paragraph the brochure says that “It was created specifically to explore and develop hydrocarbon deposits in the Caspian Sea region.”

However, on the second page the brochure singles out Turkmenistan. “Our company is solely focused on the development and production in Turkmenistan . . . “

Elsewhere it says, “After extensive review of potential partners in the Caspian Sea region, we are now focused on Turkmenistan. Our analysis demonstrated that Turkmenistan has key elements in plce to achieve our mission of long-term shared success.”

The brochure sports a picture of the New York Stock Exchange. One cannot see any connection between Turkmenistan and the NYSE except that Robert Murphy, chairman of the board of directors of Midland, is a former vice president of NYSE. Berdymuhamedov visited NYSE during his visit to New York.

Midland executives were among the few business people who had independent meetings with Berdymuhamedov in his New York visit.

Cashing on the goodwill

The exhibition and the conference created a huge reservoir of goodwill between the west and Turkmenistan. Both sides should make sure that it is not squandered away.

Before taking every step, all sides must weigh all options, explore all avenues.